Teaming up with other buyers through a clean energy aggregation can unlock new clean energy deals.
Virtual power purchase agreements (VPPAs) are one of the most economical ways for large organizations to procure renewable energy. But typically, VPPAs are only suitable for electricity demands of 100,000 MWh a year or more, which excludes small buyers.
The solution: Smaller entities can join forces and pursue an aggregated VPPA. In this arrangement, they negotiate with a renewable energy project developer as one entity, and their combined electrical loads achieve the scale needed to qualify.
How Clean Energy Aggregations Work
The process starts when a group of organizations decide to pool their clean energy demand and reach a sum large enough to qualify for a VPPA, typically at least 100,000 MWh per year.
That group then enters negotiations with a renewable energy project developer. They negotiate for the same project under the same terms, but each buyer gets their own slice of the project “pie.” The size of each buyer’s slice is based on their need.
(It is important to note that developers have different appetites for aggregations. Some will not consider aggregations at all, and others have limitations on the number of counterparties.)
Once the deal is final, the developer signs contracts with each buyer individually, who have no legal obligation to one another. From that point forward, the developer communicates project updates with each buyer and, once the project is operational, invoices each buyer separately for the volume for which they contracted.
It’s helpful to think of aggregations as a mechanism to enable access and streamline negotiations only. When the contracts are signed, the aggregation is complete — it is not an ongoing arrangement.
For example, imagine that a large corporation and five of its smaller suppliers approach the developer of a 250,000 MWh solar farm. The large buyer agrees to take 180,000 MWh and each supplier takes 16,000 MWh at the same rate and terms. The developer signs contracts with each buyer for the amount they are each taking and services each contract separately.
Who Should Pursue an Aggregation
Aggregations can unlock doors for small companies seeking an economical entry point to renewables and large companies seeking positive impact on supply chain emissions.
For example, McDonald’s announced in December that it signed a VPPA with five logistics suppliers in North America for a total of 189 MW of solar electricity (Coho served as McDonald’s adviser on this transaction). With this one transaction, 100 percent of McDonald’s logistics supply chain for all its U.S. restaurants will be powered by renewable energy.
It is important to note that McDonald’s is not buying energy for its suppliers. It merely included its suppliers in its renewable energy procurement strategy, to everyone’s benefit.
Tips for a Successful Aggregation
Today’s renewable energy market can be challenging to navigate. Supply chain issues, long grid interconnection queues and high demand have reduced availability and raised prices for VPPA projects. Smart negotiation is as important as ever.
Companies pursuing an aggregated PPA should follow these guidelines to present an attractive offer to renewable energy project developers.
- Choose partners who have similar priorities. There are many factors to consider when evaluating VPPAs, including risk tolerance, environmental impact, location and timeline. Join forces with other organizations that share your priorities so that negotiations can stay focused on what matters most to everybody. We have found that aggregations work well for groups of organizations that share characteristics or a convening body, such as universities in the same state or companies that belong to the same trade association.
- Go as big as you can with a manageable number of buyers. Scale matters a lot. The bigger the procurement, the better the deal. However, bringing too many buyers into the deal can make the deal less attractive to developers, because developers must service contracts with each individual buyer. We have found that it helps to have at least one anchor buyer contracting for a large volume of electricity. For example, a deal involving one large buyer and three small buyers will be more attractive to a developer than one involving small buyers.
- Be agile, flexible and quick. As mentioned, today’s market is tough. All buyers, whether working within an aggregation or flying solo, must be ready to act quickly when a good VPPA project presents itself — and be open-minded about some terms. This means aligning internal stakeholders on priorities and having clear lines of decision-making from the start.
- Negotiate as one. Retain one outside counsel to represent all buyers in the aggregation to keep the negotiation running smoothly and developers interested.
Successful execution can be tricky, but the tips described above and having an experienced procurement adviser will improve your chances of success.